ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis
should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements
based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions.
Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
Overview of Our Business
We are a Nevada corporation originally
incorporated under the name Bio Energy, Inc. On January 29, 2007, we incorporated a wholly owned subsidiary, Hydrodynamic Technology,
Inc. as a California corporation.
We have developed, patented, and commercialized
proprietary technology that can be used for processing of industrial fluids. Our patented
Nano Reactor®
is the critical
components of
the CTi Nano Neutralization®
System which has been shown to reduce operating costs and increase yields
in processing oils and fats. CTi holds and applied for numerous patents covering technology and various processes in US and Internationally,
covering vegetable and crude oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
During the year ended June 30, 2017, we
recorded revenue of $1,063,054. Our net loss from operations in 2017 was $1,066,945 and net cash used in operating activities was
$53,311.
Management’s Plan of Operation
At June 30, 2017 we are continuously engaged
in manufacturing Nano Reactor® and
Nano Neutralization System
which are designed to help refine vegetable oils such
as soybean, canola and rapeseed. Additionally, our near-term goal is to develop strategic and marketing tools to apply our technologies
that can be commercially accepted in enhancement of wines and spirits, industrial water treatment and consumer related products.
We have a working capital deficiency of
$1,297,730 and a stockholders’ deficit of $1,144,720 as of June 30, 2017. The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going
concern.
Management’s plan is to generate
income from operations by licensing our technology globally through our licensees, Desmet Ballestra Group (Desmet) and GEA Westfalia
Group (GEA). In January 2016, we signed a three-year global
R and D, Marketing and Technology License Agreement
with Desmet
for the sale and licensing of our reactors. The agreement expires in August 2018 or may be terminated by Desmet every August 1
should Desmet and its affiliates fail to convert a minimum of six Nano Reactors System to sold status during the period of June
1 to May 31. The agreement may also be terminated in case we lose ownership of patents and patent applications being used in our
CTi Nano Neutralization System.
As part of the agreement, Desmet is also obligated to provide us with monthly advances of
$50,000 against future sales. During the year ended June 30, 2017, advances received from Desmet amounted to $500,000. These funds
service operational expenses on a monthly basis.
In January 2017, we signed a three-year
global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications.
This agreement provides the Company with $25,000 monthly advances against future sales. This agreement may be terminated by either
party on each anniversary date. As of June 30, 2017, the Company has not yet received any advances from GEA or recorded any revenues
under this agreement. Subsequent to June 30, 2017, we received advances totaling $100,000.
In addition to these advances, we anticipate
that we may need additional funding, and we may attempt to raise additional debt and/or equity financing to fund operations and
to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient
amounts necessary to meet our needs, or that we will be able to meet our future contractual obligations. Should management fail
to obtain such financing, we may curtail its operations. Management estimates that cash on hand together with advances from Desmet
and GEA will allow us to operate beyond fiscal 2018.
The accompanying consolidated financial
statements do not include adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from our inability to continue as a going concern. As a result
of the aforementioned factors, our independent auditors, in their report on our audited consolidated financial statements as of
and for the year ended June 30, 2017, expressed substantial doubt about our ability to continue as a going concern.
Critical Accounting Policies and Revenue
Recognition
Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities
and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those we consider
most critical in preparing its consolidated financial statements. The following is a review of the accounting policies and estimates
that include significant judgments made by management using information available at the time the estimates are made. However,
these estimates could change materially if different information or assumptions were used instead.
Note 3 to our consolidated financial statements includes a
summary of significant accounting policies, estimates, and methods used in the preparation of our financial statements. Accounting
estimates are an integral part of the preparation of financial statements and are based on judgments by management using its knowledge
and experience about the past and current events and assumptions regarding future events, all of which we consider to be reasonable.
These judgments and estimates reflect the effects of matters that are inherently uncertain and that affect the carrying value
of our assets and liabilities, the disclosure of contingent liabilities and reported amounts of expenses during the reporting
period.
Revenue Recognition
Revenue from the sale of our
Nano Reactor®
systems
is being recognized when persuasive evidence of an agreement exists; shipment has occurred, including transfer of
title and risk of loss for product sales, services have been rendered for service revenues; the price to the buyer is fixed or
determinable; and collectability was reasonably assured.
We are also entitled to a profit share
from our distributor from the sale of the reactors to their customers. Pursuant to the May 2012 agreement with our distributor,
the profit share was fixed and determinable at the time of shipment, and as such, recorded upon shipment and acceptance of the
reactors by the distributor. Pursuant to the January 2016 agreement with the Company’s distributor, the profit share is not
fixed at the time of delivery, and as such, revenue is recognized when the profit share is fixed and determinable, which is generally
be upon delivery and installation of the NANO Neutralization System by the distributor to its customer.
Recoverability of Intangible and Long-Lived
Assets
Management believes that the accounting
estimate related to the recoverability of its intangible and long-lived assets is a “critical accounting estimate”
because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including
net income and non-current assets.
Testing intangible and long-lived assets
for impairment involves a high degree of judgment due to the assumptions that underlie the undiscounted cash flows analysis. In
accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that
the net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future
cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying
amount. Impairment, if any, is based on the excess of the carrying amount over the fair value based on market value when available
or discounted expected cash flows of those assets and is recorded in the period in which the determination is made. Management
believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change
or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Share-Based Compensation
We periodically issue stock options and
warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for
stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting
Standards Board whereas the value of the award is measured on the date of grant and recognized over the vesting period. We account
for stock option and warrant grants issued and vesting to non- employees in accordance with the authoritative guidance of the Financial
Accounting Standards Board whereas the value of the stock compensation is based upon the measurement date as determined at either
a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity
instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately
vested and the total stock-based compensation charge is recorded in the period of the measurement date.
Determining the fair value of share-based
awards at the measurement date requires judgment, including estimating the expected term that stock options and warrants will be
outstanding prior to exercise, the associated volatility, and the expected dividends. We estimate the fair value of options granted
using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period the options are
expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is
based on the historical volatility of our stock for a period approximating the expected life, and the risk-free interest rate is
based on the implied yield available on US Treasury zero-coupon issues approximating the expected life. Judgment is also required
in estimating the amount of share-based awards that will be forfeited prior to vesting. We believe that these assumptions are “critical
accounting estimates” because significant changes in the assumptions used to develop the estimates could materially affect
key financial measures including net income (loss).
Recent Accounting Pronouncements
See Note 3 of the financial statements
for discussion of recent accounting pronouncements.
Results of Operations
Below is summary comparing fiscal 2017
and fiscal 2016.
|
|
For the Years Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,063,054
|
|
|
$
|
1,798,217
|
|
|
$
|
(735,163
|
)
|
|
|
-41
|
%
|
Cost of revenue
|
|
|
69,441
|
|
|
|
121,505
|
|
|
|
(52,064
|
)
|
|
|
-43
|
%
|
Gross profit
|
|
|
993,613
|
|
|
|
1,676,712
|
|
|
|
(683,099
|
)
|
|
|
-41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,033,453
|
|
|
|
1,214,561
|
|
|
|
818,892
|
|
|
|
67
|
%
|
Research and development expenses
|
|
|
27,105
|
|
|
|
29,371
|
|
|
|
(2,266
|
)
|
|
|
-8
|
%
|
Total operating expenses
|
|
|
2,060,558
|
|
|
|
1,243,932
|
|
|
|
816,626
|
|
|
|
66
|
%
|
Net income (loss)
|
|
$
|
(1,066,945
|
)
|
|
$
|
432,780
|
|
|
|
(1,499,725
|
)
|
|
|
-347
|
%
|
Revenue
During the year ended June 30, 2017 revenue
decreased by 41% to $1,063,054 and was derived from the sale of eight of our
CTi Nano Neutralization Systems
and twenty-two
reactor lines (a total of 66 reactors) delivered to Desmet as part of the revised agreement entered into in January 2016. During
the year ended June 30, 2016, revenue of $1,798,217 was derived largely from the sale of four of our
CTi Nano Neutralization
Systems
and 16 additional reactor lines in order to close-out the May 2012 agreement that expired in August 2015.
Operating Expenses
Operating expenses for fiscal 2017 amounted
to $2,060,558 versus $1,243,932 in fiscal 2016, an increase of $816,626 or 66%. The increase was mostly attributable to non-cash
costs resulting from the issuance of 2.8 million shares of common stock and 11.6 million warrants to acquire shares of our common
stock to officers, consultants and a director of with a fair value of $545,000. Non-cash expense items such as amortization and
depreciation expense of $50,967, and write-off of inventory $28,049 among others, amounted to a small proportion of operating expenses,
with major expense categories being salaries and payroll taxes of approximately $548,000, legal and professional fees of approximately
$376,000, various insurance policies amounting to $115,000 and travel, insurance and marketing services fees. Research and development
(R&D) expense decreased by $2,266 or 7.7% for the year ended June 30, 2017.
Operating expenses for fiscal 2016 amounted
to $1,243,932. Non-cash expense items such as amortization and depreciation expense of $60,126, and write-off of inventory of $18,792
among others, amounted to a small proportion of operating expenses, with major expense categories being salaries and payroll taxes
of approximately $505,000, legal and professional fees of approximately $174,000, various insurance policies amounting to $96,333
and travel, insurance and marketing services fees.
Our reported Net Loss in fiscal 2017 was
$1,066,945 vs Net Income in fiscal 2016 of $432,780.
Liquidity and Capital Resources
During the fiscal year ended on June 30,
2017, cash used in operating activities was $53,311 and cash used in investing activities was $55,500 resulting from the purchase
of equipment which was financed with cash reserves and proceeds from reactor sales from our partner, Desmet Ballestra, resulted
in net decrease in cash of $108,811.
During the fiscal year ended June 30,
2016, cash used in operating activities was $759,604 and cash used in investing activities was $61,565 resulting from the purchase
of equipment of $61,565 resulted in net decrease in cash of $821,169.
The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the
Company as a going concern. During the year ended June 30, 2017, we recorded net loss of $1,066,945 and utilized $53,311
of cash in operations. As of June 30, 2017, we had a working capital deficiency of $1,297,730, and stockholders’ deficit
of $1,144,720. We have also been dependent on certain aspects of our funding from a technology agreement with a distributor.
These factors, among others, raise substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from an inability of us to continue as a going concern. In addition,
our independent registered public accounting firm, in its report on our June 30, 2017 consolidated financial statements, has raised
substantial doubt about our ability to continue as a going concern. Management’s plan is to generate income from operations
by continuing to license our technology globally through our strategic partner with the Desmet Ballestra Group (Desmet). Pursuant
to a R&D, Marketing and Technology License agreement with Desmet that was signed in January 2016, Desmet has provided us monthly
advances of $50,000 which started in January of 2016 and are expected to continue up to the expiration of the agreement in August
2018 but can be terminated on each August 1 under certain circumstances. These advances will be applied against future sales to
Desmet. During the year ended June 30, 2017 advances received from Desmet amounted to $500,000.
In January 2017, we signed a three-year
global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented applications.
This agreement provides the company with $25,000 monthly advances against future sales. This agreement may be terminated by either
party on each anniversary date. As of June 30, 2017, the Company has not yet received any advances from GEA or recorded any revenues
under this agreement. Subsequent to June 30, 2017, we received advances totaling $100,000.
We will also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet our needs, that we will be able to achieve
profitable operations or that we will be able to meet our future contractual obligations. Should management fail to obtain such
financing, we may curtail its operations.
Sources and Uses of Cash
During the fiscal year ended June 30, 2017,
net cash used in operating activities amounted to $53,311, a decrease over fiscal 2016 of almost $706,293. During the year ended
June 30, 2017 we received proceeds totaling $1,373,750 from Desmet Ballestra from sale of reactors which included $500,000 in advances
for gross profit share. This cash was used largely to pay operating costs, legal and professional service providers, acquire new
inventory, pay management salaries and to pay travel and insurance expenses.
During fiscal 2016, net cash used in operating
activities amounted to $759,604 and we received gross proceeds of $500,000 in advances against future gross profit share from
our partner, Desmet Ballestra.
Net cash used in investing activities for
property and equipment during fiscal 2017 and fiscal 2016 amounted to $55,500 and $61,565 respectively.
We did not conduct any financing activities
in the fiscal years ended June 30, 2017 and 2016.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cavitation Technologies, Inc.
Los Angeles, CA
We have audited the accompanying consolidated
balance sheets of Cavitation Technologies, Inc. (the “Company”) as of June 30, 2017 and 2016 and the related consolidated
statements of operations, stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
our audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that we
considered appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Cavitation Technologies, Inc.
as of June 30, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has
experienced recurring net losses since inception and has a stockholders’ deficit as of June 30, 2017. These matters raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 2 to the financial statements. These financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Weinberg & Company, P.A.
|
|
Weinberg & Company, P.A.
Los Angeles, California
November 3, 2017
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
548,585
|
|
|
$
|
657,396
|
|
Inventory, net
|
|
|
143,136
|
|
|
|
153,811
|
|
Total current assets
|
|
|
691,721
|
|
|
|
811,207
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
140,606
|
|
|
|
122,641
|
|
Patents, net
|
|
|
2,904
|
|
|
|
16,336
|
|
Other assets
|
|
|
9,500
|
|
|
|
9,500
|
|
Total assets
|
|
$
|
844,731
|
|
|
$
|
959,684
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
245,452
|
|
|
$
|
171,029
|
|
Accrued payroll and payroll taxes due to officers
|
|
|
994,033
|
|
|
|
994,033
|
|
Related party payable
|
|
|
1,147
|
|
|
|
1,147
|
|
Advances from distributor, net
|
|
|
748,819
|
|
|
|
436,250
|
|
Total current liabilities
|
|
|
1,989,451
|
|
|
|
1,602,459
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2017 and 2016, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 196,797,906 and 193,997,906 shares issued and outstanding as of June 30, 2017 and 2016, respectively
|
|
|
196,798
|
|
|
|
193,998
|
|
Additional paid-in capital
|
|
|
22,625,088
|
|
|
|
22,062,888
|
|
Accumulated deficit
|
|
|
(23,966,606
|
)
|
|
|
(22,899,661
|
)
|
Total stockholders' deficit
|
|
|
(1,144,720
|
)
|
|
|
(642,775
|
)
|
Total liabilities and stockholders' deficit
|
|
$
|
844,731
|
|
|
$
|
959,684
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,063,054
|
|
|
$
|
1,798,217
|
|
Cost of revenue
|
|
|
69,441
|
|
|
|
121,505
|
|
Gross profit
|
|
|
993,613
|
|
|
|
1,676,712
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
2,033,453
|
|
|
|
1,214,561
|
|
Research and development expenses
|
|
|
27,105
|
|
|
|
29,371
|
|
Total operating expenses
|
|
|
2,060,558
|
|
|
|
1,243,932
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,066,945
|
)
|
|
$
|
432,780
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share,
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
|
|
|
|
|
|
|
|
|
Basic
|
|
|
195,053,401
|
|
|
|
193,997,906
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
195,053,401
|
|
|
|
194,352,745
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
YEARS ENDED JUNE 30, 2017 AND 2016
|
|
Series A
Preferred
|
|
|
Common
Stock
|
|
|
Additional
Paid-
|
|
|
Common
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
in Capital
|
|
|
Issuable
|
|
|
Deficit
|
|
|
Total
|
|
Balance at June 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
184,968,551
|
|
|
$
|
184,968
|
|
|
$
|
21,259,285
|
|
|
$
|
812,633
|
|
|
$
|
(23,332,441
|
)
|
|
$
|
(1,075,555
|
)
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
9,029,355
|
|
|
|
9,030
|
|
|
|
803,603
|
|
|
|
(812,633
|
)
|
|
|
|
|
|
|
-
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432,780
|
|
|
|
432,780
|
|
Balance at June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
193,997,906
|
|
|
|
193,998
|
|
|
|
22,062,888
|
|
|
|
-
|
|
|
|
(22,899,661
|
)
|
|
|
(642,775
|
)
|
Issuance of common stock for services
|
|
|
|
|
|
|
|
|
|
|
2,800,000
|
|
|
|
2,800
|
|
|
|
109,200
|
|
|
|
-
|
|
|
|
|
|
|
|
112,000
|
|
Fair value of warrants issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
453,000
|
|
|
|
|
|
|
|
|
|
|
|
453,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,066,945
|
)
|
|
|
(1,066,945
|
)
|
Balance at June 30, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
196,797,906
|
|
|
$
|
196,798
|
|
|
$
|
22,625,088
|
|
|
$
|
-
|
|
|
$
|
(23,966,606
|
)
|
|
$
|
(1,144,720
|
)
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,066,945
|
)
|
|
$
|
432,780
|
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
50,967
|
|
|
|
60,126
|
|
Fair value of common stock issued for services
|
|
|
112,000
|
|
|
|
-
|
|
Fair value of vested warrants
|
|
|
453,000
|
|
|
|
-
|
|
Allowance for inventory obsolescence
|
|
|
-
|
|
|
|
18,792
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
10,675
|
|
|
|
(37,004
|
)
|
Accounts payable and accrued expenses
|
|
|
74,423
|
|
|
|
(27,657
|
)
|
Accrued payroll and payroll taxes due to officers
|
|
|
-
|
|
|
|
(22,190
|
)
|
Advances from distributor
|
|
|
500,000
|
|
|
|
436,250
|
|
Reduction in advances due to realization of revenues from distributor
|
|
|
(187,431
|
)
|
|
|
(1,620,701
|
)
|
Net cash used in operating activities
|
|
|
(53,311
|
)
|
|
|
(759,604
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(55,500
|
)
|
|
|
(61,565
|
)
|
Net cash used in investing activities
|
|
|
(55,500
|
)
|
|
|
(61,565
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(108,811
|
)
|
|
|
(821,169
|
)
|
Cash, beginning of period
|
|
|
657,396
|
|
|
|
1,478,565
|
|
Cash, end of period
|
|
$
|
548,585
|
|
|
$
|
657,396
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
1,600
|
|
|
$
|
1,600
|
|
See accompanying notes, which are an integral
part of these consolidated financial statements
CAVITATION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2017 AND 2016
Note 1 - Organization
Cavitation Technologies, Inc. (referred
to herein, unless otherwise indicated, as “the Company,” “CTi,” “we,” “us,” and
“our”) is a Nevada corporation originally incorporated under the name Bio Energy, Inc. CTi has developed, patented,
and commercialized proprietary technology that may be used in liquid processing applications. CTi’s patented
Nano Reactor®
is the critical component of CTi
Nano Neutralization® System
which has commercially been shown to reduce operating costs
and increase yields in refining vegetable oils. We have three US and one international patented systems, as well as eight US approved
patents for various processes, and have filed another fifteen US and international patents to employ our proprietary technology
in applications including vegetable and oil refining, waste water treatment, algae oil extraction, and alcoholic beverage enhancement.
In addition, we have commercialized our
CTi Nano Neutralization® System
in the refining process of certain vegetable oils which has proven to reduce costs and
increase yields for our customers.
Note 2 - Basis of Presentation and Going Concern
Going Concern
The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the
Company as a going concern. During the year ended June 30, 2017, the Company incurred a net loss of $1,066,945 and
utilized $53,311 of cash in operations. As of June 30, 2017, the Company had a working capital deficiency of $1,297,730 and a
stockholders’ deficit of $1,144,720. The Company has also been dependent on certain aspects of its funding from a technology
and license agreement with a distributor that expires in August 2018. These factors, among others, raise substantial doubt about
the Company’s ability to continue as a going concern.
The accompanying consolidated financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.
Management’s plan is to generate income from operations by continuing to license its technology globally through our strategic
partner with the Desmet Ballestra Group (Desmet). Pursuant to a R&D, Marketing and Technology License agreement with Desmet
that was signed in January 2016, Desmet has provided the Company with monthly advances of $50,000 which started in January of 2016
and are expected to continue through expiration of the technology and license agreement in August 2018. These advances are expected
to be applied against future sales to Desmet. During the year ended June 30, 2017 advances received from Desmet amounted to $500,000.
In January 2017, the Company signed a
three-year global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes and patented
applications. This agreement provides the Company with $25,000 monthly advances against future sales, and may be terminated by
either party on each anniversary date. As of June 30, 2017, the Company has not yet received any advances from GEA or recorded
any revenues under this agreement. Subsequent to June 30, 2017, we received advances totaling $100,000.
The Company may also attempt to raise additional
debt and/or equity financing to fund operations and to provide additional working capital. There is no assurance that such financing
will be available in the future or obtained in sufficient amounts necessary to meet the Company’s needs, that the Company
will be able to achieve profitable operations or that the Company will be able to meet its future contractual obligations. Should
management fail to obtain such financing, the Company may curtail its operations.
Note 3 - Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include
the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. Intercompany transactions
and balances have been eliminated in consolidation.
Fair Value Measurement
FASB Accounting Standards Codification
(“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of
a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
In addition to defining fair value, the
standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The
hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable
in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input
that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - inputs are based upon unadjusted
quoted prices for identical instruments traded in active markets.
Level 2 - inputs are based upon significant
observable inputs other than quoted prices included in Level 1, such as quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - inputs are generally unobservable
and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow
models, and similar techniques.
As of June 30, 2017, the carrying value
of certain accounts such as inventory, accounts payable, accrued expenses and accrued payroll approximates their fair value due
to the short-term nature of such instruments.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement
date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in reserves for
inventory obsolescence, valuing our stock options, stock warrants and common stock issued for services and realization of our deferred
tax asset, among other items. Actual results could differ from these estimates.
Revenue Recognition
Revenue from the sale of the Company’s
Nano Reactor® Systems
is recognized when persuasive evidence of an agreement exists; shipment has occurred, including
transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer
is fixed or determinable; and collectability is reasonably assured.
The Company is also entitled to a profit
share from its distributor from the sale of the reactors to their customers. Pursuant to the May 2012 agreement with our distributor,
the profit share was fixed and determinable at the time of shipment, and as such, recorded upon shipment and acceptance of the
reactors by the distributor
.
Pursuant to the January 2016 agreement
with the Company’s distributor, the profit share is not fixed at the time of delivery, and as such, revenue is recognized
when the profit share is fixed and determinable, which will generally be upon delivery and installation of the
NANO Neutralization
System
by the distributor to its customer.
Cash
The Company considers highly liquid investments
with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates
market value.
The Company maintains its cash with one
domestic financial institution. From time to time, cash balance in this domestic bank may exceed federally insured limits provided
by the Federal Deposit Insurance Corporation (“FDIC”) of up to $250,000. As of June 30, 2017 and 2016, before adjustments
for outstanding checks and deposits in transit, the Company had approximately $549,000 and $657,000, respectively, on deposit with
one bank. The Company believes that no significant concentration of credit risk exists with respect to this cash balances because
of its assessment of the creditworthiness and financial viability of this financial institution.
Inventory
Inventory, net of an allowance for excess
quantities and obsolescence, is stated at the lower of cost or market. Cost is determined on a specific item basis. Inventory is
composed of finished goods and represents costs incurred to manufacture the Company’s
Nano Reactor®
systems.
Property and Equipment
Property and equipment is presented at
cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of
the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs
and maintenance charges are expensed as incurred. The cost and related accumulated depreciation applicable to retired assets are
removed from the Company’s accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements
of operations.
Property and equipment are recorded at
cost and depreciated using the straight-line method over the following estimated useful lives.
Leasehold improvements
|
|
Shorter of life of asset or lease
|
Furniture
|
|
5-7 Years
|
Office equipment
|
|
5 Years
|
Lab equipment
|
|
4 Years
|
Skid systems
|
|
4 Years
|
Management assesses the carrying value
of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the
asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized
to write down the asset to its estimated fair value. For the years ended June 30, 2017 and 2016, the Company did not recognize
any impairment for its property and equipment.
Patents
Capitalized patent costs represent legal
fees associated with procuring and filing patent applications. The Company accounts for patents in accordance with ASC 350-30,
General Intangibles Other Than Goodwill
. The Company has five patents issued in fiscal 2013, 2012 and 2011. As of June 30,
2017, the Company has a total of 25 patents pending. The patents have duration of twenty years from filing date. The Company amortizes
its patents over a four-year period which we believe is a reasonable estimate based upon its estimate of time until the next generation
of reactors is developed or until other forms of competition appear.
During the year ended June 30, 2017, the
Company recognized patent amortization expense of $13,432. As of June 30, 2017, total capitalized patent costs amounted to $129,363
and accumulated amortization of $126,459 or a net balance of $2,904.
During the year ended June 30, 2016, the
Company recognized patent amortization expense of $20,830. As of June 30, 2016, total capitalized patent costs amounted to $129,363
and accumulated amortization of $113,027 or a net balance of $16,336.
At June 30, 2017, future estimated patent
amortization costs are as follows:
Year Ended
|
|
|
|
June 30,
|
|
Amount
|
|
2018
|
|
|
2,904
|
|
Total
|
|
$
|
2,904
|
|
Impairment of Intangible and Long-Lived
Assets
In accordance with ASC 350-30,
General
Intangibles Other than Goodwill
, the Company evaluates amortizable intangibles and long-lived assets for impairment whenever
events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances
exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over
their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying
amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded
in the period in which the determination is made. Based on the Company annual impairment tests, management believes there is no
impairment of its intangibles and long-lived assets as of June 30, 2017 and 2016. There can be no assurance, however, that market
conditions will not change or demand for the Company’s products under development will continue. Either of these could result
in future impairment of intangibles and long-lived assets.
Share-Based Compensation
The Company periodically issues stock
options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs.
The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided
by the Financial Accounting Standards Board whereas the value of the award is measured on the date of grant and recognized over
the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board whereas the value of the stock compensation is based
upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date
at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally
are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance
requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded
in the period of the measurement date.
The fair value of the Company’s common stock option and warrant grants is estimated
using the Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility,
expected life of the options and warrants, and future dividends. Compensation expense is recorded based upon the value derived
from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option
pricing model could materially affect compensation expense recorded in future periods.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740-10,
Income Taxes
. The Company recognizes deferred tax assets and liabilities to reflect
the estimated future tax effects, calculated at anticipated future tax rates, of future deductible or taxable amounts attributable
to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold
that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company
classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties
assessed or paid.
The Company measures and records uncertain
tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective
date may be recognized or continue to be recognized.
Advertising Costs
Advertising costs, including marketing
expense, incurred in the normal course of operations are expensed as incurred. Advertising expenses amounted to $30,996 and $45,241
for the years ended June 30, 2017 and 2016 respectively and was reported as part of General and administrative expenses in the
accompanying Consolidated Statements of Operations.
Research and Development Costs
Research and development expenses relate
primarily to the development, design, testing of preproduction prototypes and models, compensation, and consulting fees, and are
expensed as incurred. Total research and development costs recorded during the years ended June 30, 2017 and 2016 amounted to $27,105
and $29,371, respectively.
Warranty Policy
The Company provides a limited warranty
with every set of reactors sold, typically 2 to 5 years. The Company has not experienced significant claims under its warranty
policy, and management determined no accrual for warranty reserve was necessary at June 30, 2017 and 2016.
Net Income (loss) Per Share
The Company’s computation of earnings
per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income available to common stockholders
divided by the weighted average common shares outstanding for the period. Diluted income per share reflects the potential
dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company as if
they had been converted at the beginning of the periods presented, or issuance date, if later. In computing diluted income per
share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase
common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury
stock method only when the average market price of the common stock during the period exceeds the exercise price of the options
and warrants. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
The following table sets forth the computation
of basic and diluted income per common share.
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,066,945
|
)
|
|
$
|
432,780
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic
|
|
|
195,053,401
|
|
|
|
193,997,906
|
|
Dilutive effect of outstanding stock options
|
|
|
-
|
|
|
|
354,839
|
|
Weighted average shares – diluted
|
|
|
195,053,401
|
|
|
|
194,352,745
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.00
|
)
|
|
$
|
0.00
|
|
There were no adjustments to net income
(loss) required for purposes of computing diluted earnings per share. At June 30, 2017 and 2016, the Company excluded the outstanding
securities summarized below, which entitle the holders thereof to acquire shares of common stock, from its calculation of its
diluted earnings per share, as their effect would have been antidilutive.
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Options
|
|
|
11,685,852
|
|
|
|
12,241,153
|
|
Warrants
|
|
|
75,926,510
|
|
|
|
64,326,510
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. ASU
2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under
current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also
will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. The adoption of this pronouncement could affect the timing of the recognition of the Company’s revenues related
to the gross profit share from the sale of reactors by our distributor to the end customer. The Company is in the process of evaluating
the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease
liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual
reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating
the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
In July 2017, the FASB issued Accounting
Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and
Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the
Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Non-controlling Interests with a Scope Exception ("ASU 2017-11"). ASU 2017-11 allows companies to exclude a down round
feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity's
own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required
to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered
and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat
the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities
will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective
for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.
The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The adoption of ASU 2017-11 is not
expected to have any impact on the Company's financial statement presentation or disclosures.
Other recent accounting pronouncements
issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future
consolidated financial statements.
Dependence on Desmet Ballestra
The Company’s revenue is entirely
dependent on Desmet Ballestra who is its exclusive distribution agent with regard to the
CTi Nano Neutralization® System
for edible oils. During the year ended June 30, 2017 and 2016, 100% of the Company’s revenue was derived from Desmet (see
Note 4).
Note 4 - Agreement with Desmet Ballestra
2012 Agreement
On May 14, 2012 the Company signed a three-year
global
Research and Development, Marketing and Technology License Agreement
with the n.v. Desmet Ballestra Group s.a. (Desmet),
a Belgian company that is actively marketing the
NANO Neutralization System
, the key component of which is the Company’s
reactor to soybean and other vegetable oil refiners. The agreement provided Desmet (licensee) a limited, exclusive license and
right to develop, design and supply Nano Reactor® systems which incorporate Nano Reactor® devices on a global basis but
is limited to oils and fats and oleo chemical applications. The Company (licensor) remains owner of the current patents and patent
applications but Desmet will be co-owner of any new process patent applications jointly developed. Desmet provided, under certain
conditions, limited monthly advance payments of $125,000 against future sales to CTi through May 15, 2015. The agreement with Desmet
expired in May 2015.
Pursuant to the 2012 Agreement, the Company
was recognizing revenue from the sale of the reactors upon shipment and acceptance by Desmet as the Company had no further obligations
to Desmet other than the reactor’s two-year standard warranty. In addition, the Company was also entitled to a non-refundable
share in gross profit from the sale of Desmet’s integrated neutralization system to its customer of which the reactors are
an integral component. Such revenues were recognized upon shipment of the reactors to Desmet as these amounts were fixed and the
Company had no further obligation or commitment in the installation of the integrated neutralization system to Desmet’s customer,
other than the reactors warranty.
During the year ended June 30, 2016 the
Company recorded revenues from reactor sales of $420,001 and gross profit share of $1,200,700 or a total of $1,620,701 pursuant
to the 2012 agreement.
As of June 30, 2016, the Company had no
further obligations to Desmet under this agreement. There were no revenues recorded under this agreement in fiscal 2017.
2016 Agreement
On January 22, 2016, the Company signed
a similar three-year agreement with Desmet effective August 1, 2015. In addition for the payment upon shipment of the nano reactors,
Desmet agreed to provide monthly advance payments of $50,000 to be applied against gross profit share earned by the Company on
installation of the nano reactors by Desmet to its customers. The agreement expires in August 2018 or may be terminated by Desmet
every August 1 should Desmet and its affiliates fail to convert a minimum of six Nano Reactors systems to sold status during the
period of June 1 to May 31. The agreement may also be terminated in case the Company were to lose its rights under the patents
and patent applications being used in the Company’s
CTi NANO Neutralization System.
Revenue from the sale of our
Nano Reactor®
systems
is being recognized when persuasive evidence of an agreement exists; shipment has occurred, including transfer of
title and risk of loss for product sales, services have been rendered for service revenues; the price to the buyer is fixed or
determinable; and collectability was reasonably assured. We are also entitled to a profit share from our distributor from
the sale of the reactors to their customers. Pursuant to the January 2016 agreement with the Company’s distributor,
the profit share is not fixed at the time of delivery, and as such, revenue is recognized when the profit share is fixed and determinable,
which is generally be upon delivery and installation of the NANO Neutralization System by the distributor to its customer.
During the year ended June 30, 2016, the
Company recorded revenues of $177,516 from reactor sales and received $500,000 of advance payments pursuant to the 2016 agreement.
As of June 30, 2016, $63,750 of the recorded revenues was not yet collected, as such, for financial reporting purposes the Company
deducted this amount from the advance payments received which resulted in a net balance of $436,250 in advances from Desmet.
During the year ended June 30, 2017, the
Company recorded revenues of $895,000 from reactor sales and $168,054 from gross profit share for a total of $1,063,054 and received
$500,000 of advance payments pursuant to the 2016 agreement. As of June 30, 2017, $85,000 of the recorded revenues was not yet
collected, as such, for financial reporting purposes the Company deducted this amount from the advance payments received which
resulted in a net balance of $748,819 in advances from Desmet.
Note 5 - Property and Equipment
Property and equipment consists of the
following as of June 30, 2017 and June 30, 2016:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
2,475
|
|
|
$
|
2,475
|
|
Furniture
|
|
|
26,837
|
|
|
|
26,837
|
|
Office equipment
|
|
|
1,499
|
|
|
|
1,499
|
|
Equipment
|
|
|
68,380
|
|
|
|
68,380
|
|
Systems
|
|
|
408,155
|
|
|
|
352,655
|
|
|
|
|
507,346
|
|
|
|
451,846
|
|
Less: accumulated depreciation and amortization
|
|
|
(366,740
|
)
|
|
|
(329,205
|
)
|
Property and equipment, net
|
|
$
|
140,606
|
|
|
$
|
122,641
|
|
Depreciation expense for the years ended
June 30, 2017 and 2016 amounted to $37,535 and $39,296, respectively and was reported as part of General and administrative expenses
in the accompanying Consolidated Statements of Operations.
Note 6 - Accrued Payroll and Payroll Taxes to Officers and
former officers
As of June 30, 2017 and 2016, the Company
had accrued unpaid salaries to officers and former officers amounting to $994,033.
Note 7 - Stockholders’ Deficit
Common Stock
Year ended June 30, 2017
During the year ended June 30, 2017 the
Company issued 2,800,000 shares of common stock valued at $112,000 to service providers and a director for services rendered. These
shares were valued at fair value at the date of issuance.
Year ended June 30, 2016
On September 25, 2015, the Company issued
9,029,355 shares of common stock with a value of $812,633 pursuant to a settlement of notes payable in April 2014. These shares
were reflected as Common Stock issuable in the accompanying Statement of Changes in Stockholders’ Deficit as of June 30,
2016. Such amounts were reclassified to additional paid in capital upon their issuance during the year ended June 30, 2016.
Preferred Stock
On March 17, 2009, the Company filed
an Amended and Restated Articles of Incorporation and created two new series of preferred stock, the first of which is designated
Series A Preferred Stock and the second of which is designated as Series B Preferred Stock. The total number of shares of
Common Stock which this corporation has authority to issue is 1,000,000,000 shares of Common Stock and 10,000,000 shares of Preferred
Stock of which 5,000,000 shares are designated as Series A Preferred Stock, and 5,000,000 shares are designated as Series B Preferred
Stock, with the rights, preferences and privileges of the Series B Preferred Stock to be designated by the Board of Directors.
Each share of Common Stock and Preferred Stock has a par value of $0.001. As of June 30, 2017 and 2016, there are no shares of
Series A or Series B Preferred Stock issued and outstanding.
Stock Options
The Company has not adopted a formal stock
option plan. However, it has assumed outstanding stock options resulting from the acquisition of its wholly-owned subsidiary, Hydrodynamic
Technology, Inc. In addition, the Company has made periodic non- plan grants. A summary of the stock option activity from June
30, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2015
|
|
|
12,810,957
|
|
|
$
|
0.44
|
|
|
|
5.35
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(214,965
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2016
|
|
|
12,595,992
|
|
|
$
|
0.44
|
|
|
|
4.96
|
|
- Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
- Expired
|
|
|
(910,140
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2017
|
|
|
11,685,852
|
|
|
$
|
0.37
|
|
|
|
2.41
|
|
As of June 30, 2017 and 2016, all outstanding
options were fully vested and exercisable. The intrinsic value of the outstanding options as of June 30, 2017 was $110,000. The
following table summarizes additional information concerning options outstanding and exercisable at June 30, 2017.
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Remaining
|
|
Price
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
11,000,000
|
|
|
|
5.36
|
|
|
$
|
0.03
|
|
|
|
11,000,000
|
|
|
|
5.36
|
|
$
|
0.33
|
|
|
174,022
|
|
|
|
0.89
|
|
|
$
|
0.33
|
|
|
|
174,022
|
|
|
|
0.89
|
|
$
|
0.67
|
|
|
511,830
|
|
|
|
0.97
|
|
|
$
|
0.67
|
|
|
|
511,830
|
|
|
|
0.97
|
|
|
|
|
11,685,852
|
|
|
|
|
|
|
|
|
|
|
|
11,685,852
|
|
|
|
|
|
Warrants
A summary of the Company’s warrant activity and related
information from as of June 30, 2017 and 2016 is as follows.
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Warrants
|
|
|
Price
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
68,259,843
|
|
|
$
|
0.07
|
|
|
|
5.77
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(3,933,333
|
)
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
64,326,510
|
|
|
$
|
0.07
|
|
|
|
5.09
|
|
Granted
|
|
|
11,600,000
|
|
|
|
0.03
|
|
|
|
7.5
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
75,926,510
|
|
|
$
|
0.06
|
|
|
|
4.81
|
|
In January of 2017, the Company issued
warrants to purchase 11,600,000 shares of common stock to Directors, Officers, employees and consultants. The warrants are exercisable
at $0.03 per share, vesting immediately and expiring in 10 years from the grant date. Total fair value of these warrants at grant
date was $453,000 using the Black-Scholes Option Pricing model with the following average assumptions: stock price of $0.04 per
share, estimated life of 7.5 years; risk free interest rate of 2.15%; volatility of 173%, and dividend yield of 0%.
As of June 30, 2017 and 2016, all outstanding
warrants were fully vested and exercisable. The intrinsic value of the outstanding warrants as of June 30, 2017 was $116,000. The
following table summarizes additional information concerning warrants outstanding and exercisable at June 30, 2017.
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
of Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
of Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.03 - 0.07
|
|
|
55,599,851
|
|
|
|
6.75
|
|
|
$
|
0.05
|
|
|
|
55,599,851
|
|
|
$
|
0.05
|
|
0.12
|
|
|
20,326,659
|
|
|
|
3.25
|
|
|
$
|
0.12
|
|
|
|
20,326,659
|
|
|
$
|
0.12
|
|
|
|
|
75,926,510
|
|
|
|
|
|
|
|
|
|
|
|
75,926,510
|
|
|
|
|
|
Note 8 - Income Taxes
Total income tax expense differed from
the amounts computed by applying the U.S. Federal and state income tax rate before income tax expense as a result of the NOL carry
forward. Therefore, the Company’s effective tax rate is 0.0%. The Company files income tax returns in the United States (“Federal”)
and California (“State”) jurisdictions. The Company is subject to Federal and State income tax examinations by tax
authorities for all years since its inception.
At June 30, 2017, the Company had Federal
and State net operating loss carry forwards available to offset future taxable income of approximately $10 million. These carry
forwards will begin to expire in the year ending June 30, 2018 through 2023, subject to IRS limitations, including change in ownership.
The Company periodically evaluates the
likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by a valuation
allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. The Company
considers many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative
earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available
to us for tax reporting purposes, and other relevant factors.
At June 30, 2017, based on the weight of
available evidence, including cumulative losses in recent years and expectations of future taxable income, the Company determined
that it was more likely than not that its deferred tax assets of approximately $4.4 million would not be realized. Accordingly,
the Company has recorded a valuation allowance for 100% of its cumulative deferred tax assets. The components of our deferred tax
assets are as follows.
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net Operating loss carryforwards
|
|
$
|
4,118,000
|
|
|
$
|
3,585,000
|
|
Stock compensation expense
|
|
|
957,000
|
|
|
|
725,000
|
|
Amortization of Patents
|
|
|
69,000
|
|
|
|
58,000
|
|
Reserve for Obsolete Inventory
|
|
|
68,000
|
|
|
|
68,000
|
|
Total net deferred tax assets
|
|
|
5,212,000
|
|
|
|
4,436,000
|
|
Less valuation discount
|
|
|
(5,212,000
|
)
|
|
|
(4,436,000
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the difference between
the expense and income taxes as the statutory US federal income tax are as follows:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Federal statutory rate
|
|
|
(34
|
)%
|
|
|
34
|
%
|
State income taxes
|
|
|
(7
|
)%
|
|
|
7
|
%
|
Net operating loss/carryforward
|
|
|
41
|
%
|
|
|
(41
|
)%
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
As a result of the implementation of certain
provisions of ASC 740-10, the Company performed an analysis of its previous tax filings and determined that there were no positions
taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of June 30, 2017.
Future changes in the unrecognized tax
benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company
estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify
income tax penalties and interest, if any, as part of interest and other expenses in its consolidated statements of operations.
There is no interest or penalties accrued as of June 30, 2017.
The following summarizes the open tax
years for each major jurisdiction:
Jurisdiction
|
|
|
Open Tax Years
|
|
|
|
|
Federal
|
|
|
2013 - 2017
|
California
|
|
|
2012 - 2017
|
The Company’s net operating loss
carry forwards are subject to IRS examination until they are utilized and such tax years are closed.
Note 9 - Commitments and Contingencies
Lease Agreement
The Company leases approximately 5,000
square feet of office and warehouse space under a non-cancellable operating lease agreement through February 1, 2018. Monthly
payments are approximately $5,000 per month. The Company has a security deposit of $9,500 associated with this lease. Future minimum
lease payments under our non-cancelable operating lease through February 2018 are $35,000.
Total rent expense was $64,822 and $53,359
for the years ended June 30, 2017 and 2016 and was reported as part of General and administrative expenses in the accompanying
Consolidated Statements of Operations,
Royalty Agreements
On July 1, 2008, the Company’s wholly
owned subsidiary entered into Patent Assignment Agreements with two parties, its President as well as its former Chief Executive
Officer (CEO) and current Technology Senior Manager, where certain devices and methods involved in the hydrodynamic cavitation
processes invented by the President and former CEO/ current Technology Senior Manager have been assigned to the Company. In
exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the President and former CEO/ current Technology
Senior Manager for licensing of the technology and leasing of the related equipment embodying the technology. These agreements
were subsequently assigned to Cavitation Technologies on May 13, 2010. The Company’s former CEO/ current Technology
Senior Manager and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any
gross revenue generated through June 30, 2017.
On April 30, 2008 (as amended November
22, 2010), the Company’s wholly owned subsidiary entered into an employment agreement with the Director of Chemical and Analytical
Department (the “Inventor”) providing that the Inventor shall receive an amount equal to 5% of actual gross royalties
received from the royalty stream in the first year in which the Company receives royalty payments from the patent which the Inventor
was the legally named inventor, and 3% of actual gross royalties received by the Company resulting from the patent in each subsequent
year. As of June 30, 2017, no patents have been granted in which this person is the legally named inventor.
Litigation
The Company may
be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income
tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes
that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with
the contingency are expensed as incurred.
In August 2014,
a former employee and former Director filed an administrative Complaint for approximately $179,000 in unpaid wages, plus penalties
and interest, with the California Labor Commissioner’s Office (CLCO). In January 2016, the CLCO ruled in favor of
the Company and dismissed the case. As a result of this ruling, the Company’s obligation to the former employee and former
Director only amounted to approximately $131,000 which was already accrued in prior periods and included as part of Accrued Payroll
and payroll taxes due to officers in the accompanying balance sheet.
In February 2016,
the former employee and former Director appealed this ruling to the Los Angeles County Superior Court. In addition to defending
itself, the Company also has filed a cross-complaint against the former employee and former Director for breach of contract and
breach of fiduciary duty as a Director.
In October 2017,
the Company settled the lawsuit with the Plaintiff for $30,000. Upon payment of the settlement amount, the Complaint and Cross-complaint
between the Company and the Plaintiff will be dismissed with prejudice. As a result, the Company will record a gain of $101,000
in October 2017 to extinguish the remaining accrual upon payment of the settled amount of $30,000.
Note
10 - Subsequent Events
In January 2017,
we signed a three-year global R&D, Marketing and Technology License Agreement with GEA Group, (GEA) covering certain processes
and patented applications. This agreement provides the Company with $25,000 monthly advances against future sales. This agreement
may be terminated by either party on each anniversary date. In July 2017, the Company received advances totaling $100,000 pursuant
to this agreement.